My first introduction to international trade and tariffs came when the freight forwarder called asking me to deliver the check for the “aggregate tariff fees” for my shipment so they could pick up the container from the local port. When I placed the order, the final price was supposed to be delivered to my warehouse. Still, the company listed the items with a different product code than what they were supposed to be, flagging the tariffs. The bags I needed to fulfill this order we less than 20 minutes away but because of the tariffs to spur US textile industry I was forced to pay a fairly large tax on these goods before customs would release them. I was ultimately able to adjust it to reduce the fees, but the entire exercise taught me a few key lessons.
For context, my first company was a disaster preparedness consulting company, which also had a line of high-end disaster (earthquake) preparedness kits for both companies and individual consumers. After the Kobe earthquake, I received a massive order from Japan and needed to act fast.
Why not buy American?
I tried! I went to my current supplier in Los Angeles. They told me it would take 9 months to make the bags because they didn’t have enough sewing machines and labor. I called multiple companies but no one had immediate capacity ecept one that wanted 10x the normal cost to make it worth it to them. Venting to a friend he connected me to a Chinese broker that got me a quote from a Chinese textiles company that had excess capacity who could fill the order quickly at a reasonable price.
The Costs of Increased Capacity
Who turns down a contract this size? Apparently, many companies. None were interested in a one-time order. One of the companies agreed to do it if I guaranteed a specific level of business that would make the investment worthwhile. I contacted these companies to understand why they turned down the order and naively asked why they could not add another line or a second shift. From the outside in, who would not want to run their machines for a second 8-hour shift to make these? Their answers surprised me.
- The Challenges of Labor – The reality is that getting people to work a “night shift” is hard. The first challenge is availability. Many skilled sewing workers already had a second job or needed to care for their kids. The increased hourly wage attracts workers for both the night shift and an additional line. If you increase the wage rate for another line to attract talent, you will need to increase the pay of the current workers. They would also need one or two managers, all of whom are not worth the effort.
- The Challenges of Machines—They told me it would take two weeks to a month to order, deliver, and set up the industrial sewing machines. You just cannot go down to your local arts and crafts store and buy one off the shelf. While not insanely expensive—around $1,500 each—buying ten to twenty requires a cash outlay that they may not have budgeted for. For a second line, most did not have the space or even electrical outlets for them.
- Equipment Wear and Tear and Repairs—They do all of their repairs during the night shift. Adding the second shift would decrease the maintenance window, often forcing maintenance to work the graveyard shift, which is even more expensive and problematic. Running the extra shift adds wear and tear on the existing machines, creating downtime that may negatively impact current deliverables.
- The Challenge of Raw Materials—Even my current supplier indicated he would have a challenge getting the raw materials, especially the zippers for the bags, as he would need to buy a significant quantity. Currently, he was using excess inventory from another client’s project. This would require lead time and the money to purchase the larger volume.
The Decision to Import
Just as I questioned the lack of interest from these business owners, I needed to make the same decision. Should I turn down this order, which I have been working on? I had to choose to invest in these US companies, wait longer, and risk losing the contract, or go with China for faster delivery and higher profit. I decided to import. Even with the surprise tariff, the quality was good, getting the bags from China solved my problem without worrying about extra costs or delays. The Chinese company had excess capacity and needed business, so it worked well for us both.
In the end, it was the best decision, as the Japanese department store did not place a second order. The panic from the earthquake diminished, and other local companies had entered the market, making my prices too expensive and would have been prohibitive had I locked in the higher costs of making in the US.
Utilizing Excess Capacity
This experience taught me a lot about capacity utilization. For that same company, there was a wholesaler where I bought a number of components. When I would pick up supplies in the afternoon, I often saw the warehouse workers playing football or taking a nap in the back of the warehouse. I asked the foreman about it, and he told me the utilization varies depending on the order. They need them on peak order fulfilment days, and on other days, they have as much as half a day without any work. Most would have to take jobs elsewhere if they did not pay them for 8 hours.
I asked if I could “rent them” and some space in the warehouse. While they were technically a competitor to me, having their excess labor pack my kits saved me from bringing them to my garage and allowed me to use their volume shipping etc. This saved me about 25% of my total cost of goods sold and freed me up for more consulting. It turned out to be a win-win for both of us.
Today’s Applicability
Companies will face similar decisions with the increased tariffs that have been imposed. For many components, there are sometimes no domestic manufacturers; if there are, it will take time to increase capacity. Will people pay a premium for products that were cheaper before? That is the question business owners will need to ask.
It is precisely those same problems that will be faced. While we have an unemployment problem in the US for many businesses, especially where they require skills, there may not be workers. Look at the challenges the companies that are building ships for the Navy face. They are years behind in deliveries due to a lack of skilled labor. Those same industrial skills needed for building ships apply to card and most parts that go into assembled goods, and trying to fill these jobs in the US will be a significant challenge.